Operação Lava Jato update – current scenario

The headquarters of the Brazilian state oil company, Petrobras, in Rio de Janeiro. Photo credit: Andre Vieira/The New York Times.

In the past eighteen months, the world has observed Brazil’s largest company deepen in a corruption scandal involving money laundering, manipulation of public contracts and cartelization. This week, our blog is going to share a series of articles that aims to present a broad overview of the institutional crisis, which has already affected politicians and contractors in different levels.

In the last decade, Brazil seemed to be on the verge of the kind of sustainable economic boom that its leaders had predicted for years. In 2010, the country’s economy expanded at the rate of 7.5 percent, its greatest performance in 24 years, and alongside China, India and Russia, Brazil was regarded as among the world’s most promising emerging markets.

Oil has been central to Brazil’s strategy, especially after the discoveries of large reserves in the pre-salt area. Due to that, Brazil’s largest company has had a leading role in the nation’s growing influence and it has accounted for roughly 10 percent of Brazil’s gross domestic product.

In 2014, amid a tight presidential election debate, the Petrobras crisis emerged to the public as the Federal Police led an operation in a gas station – therefore it was given the name Operação Lava Jato, Portuguese for Carwash Operation. Among the first group to be arrested was Alberto Youssef, a money launderer and black-market money dealer. In his testimonies, he wrote down names of participants and described an elaborate bribery scheme involving the government-controlled oil giant.

How the corruption scheme was articulated

Petrobras spends more than USD 20 billion every year expanding its capacity, building new plants and servicing facilities. Much of this money is invested through subcontracted companies that have long fought one another for the business opportunities. But about a decade ago, according to prosecutors, these companies formed a cartel and decided, in advance, which of them would win a particular deal and then charge vastly more than they would in a free market.

The cartel had 16 members by 2006, including blue-chip behemoths like Odebrecht and Camargo Corrêa. Members were soon landing all major Petrobras contracts, with an assist from Petrobras insiders like Paulo Roberto Costa, former director of supply, and Jorge Zelada, former director of the company’s international division. From 1 to 5 percent of the value of a given contract was diverted to those on the receiving end of the scheme, a group that included 50 politicians from six parties, according to prosecutors.

Money from cartel members took a circuitous route to politicians’ pockets, passing through ghost corporations whose owners made bribes look like consulting fees. They kept a small percentage for their efforts and then passed funds on to one of a handful of doleiros — the word translates, imperfectly, as money changers — who shuffled funds in the scheme. The money dealers, among them Youssef, would keep a cut, spreading the bulk around to politicians and accomplices.

In December, a former Petrobras employee named Pedro Barusco pledged to give back all USD 100 million he had illegally earned. And it was just the beginning. Barusco told authorities in February that the ruling Workers Party had pocketed up to USD 200 million over the years, money that was supposedly used to finance political campaigns.

Another big break in the case came when surveillance discovered an e-mail from Alberto Youssef describing a Range Rover purchased for Paulo Roberto Costa. From 2004 to 2012, Costa was Petrobras’ director of supply, a job that put him in the ideal position to approve major contracts. He was eventually arrested and became the first Lava Jato insider to talk.

To date, 117 indictments have been issued, five politicians have been arrested, and criminal cases have been brought against 13 companies. Petrobras officials have pegged the total of all bribes at nearly USD 3 billion.

The current moment translates uncertainty

In Brazil, Petrobras’ plunge is so cataclysmic, according to analysts, that it is a major reason the economy is expected to contract by more than one percentage point this year, whilst unemployment is up.

The company has lost more than half its value in the last year, about USD 70 billion in market cap. Part of that stems from the worldwide decline in oil prices, but none of the company’s rivals has been punished as severely. That plunge has had repercussions for investors worldwide. Petrobras had been a favorite investment for big emerging-market bond funds sold to United States investors, for instance.

Judge Sérgio Moro, who is overseeing the investigations, has shown willingness to pursue even the eminent and influential.

Brazil seems to have been taken by a wave of pessimism and uncertainty. It is common among Brazilians to distrust the justice system, which has always had a reputation of only favoring the rich. There is some sort of optimism though, as people hope that this time the investigations will lead to the arrest of all involved individuals, no mattering who they are. Judge Sérgio Moro, who is overseeing the investigations, has shown willingness to pursue even the eminent and influential. During a recent visit to the courthouse where he presides in Curitiba, ribbons of yellow and green were tied around trees in expressions of support.

Many projects, including the petrochemical complex Comperj, have been halted, and many people were laid off. Four construction companies have gone bankrupt. But not all of Lava Jato’s reckonings are so grim. Prosecutors and the federal police have been seizing cash and assets, including fine art. Because storing expensive paintings and photographs is not a law enforcement specialty, the entire haul has been handed over to the Oscar Niemeyer Museum in Curitiba. Since April, the works, mostly by Latin American masters such as Heitor dos Prazeres and Vik Muniz, have starred in an exhibit called “Art in the Custody of the Museum.”

Obras Sob a Guarda do MON – Art in the Custody of the Museum. Photo credit: Marcelo Andrade/Gazeta do Povo.